Does a Foreign Degree Pay? The Return to Foreign Education in China

Abstract

A large body of literature is devoted to estimating causal effects of schooling; however, few studies have addressed the returns on education overseas. In this paper, we focus on the causal impact of holding a foreign education degree on one's performance in the homeland labor market in the context of China, the world's leading source of students pursuing education overseas. To address the issue of endogeneity, we construct an instrumental variable based on the exchange rate when the individual is about to make further education plans to isolate the arguably exogenous cost‐side shocks to one's education decision. Utilizing data from the China Household Financial Survey, we find that holding a foreign education degree has no effect on one's propensity to join the labor market but leads to a 108.95% increase in one's wage upon employment. Moreover, such effects display significant heterogeneity among returnees regarding their background. Specifically, returnees earn less if they went abroad after China joined the WTO, work in public sectors or have rich family resources.

Keywords: Foreign education degree, Wage, Instrumental variable, China